Ford Trims Debt 28%, Pressuring GM and Chrysler

--Ford swappted 9.9 bil (28%) of debt for equity, ratchesting up the pressure on competitors ---38 cents for each dollar in the debt to equity deal ---half of F's healthcare liability 6.6 bil can be paied in stocks By MATTHEW DOLAN and JOHN D. STOLL Ford Motor Co. said Monday its investors agreed to exchange $9.9 billion in debt for cash and stock, ratcheting up the pressure on its struggling U.S. competitors that also are trying to cut debt. Ford's 28% reduction in its overall debt comes as General Motors Corp. and Chrysler LLC have failed to make significant progress in their discussions with bondholders and lenders. Both car makers are trying to shave significant debt obligations in coming weeks to meet the Obama administration's demand for a major reorganization in exchange for continuing federal support. The U.S. Treasury last week began talking to Chrysler's secured lenders about eliminating more than $5 billion of Chrysler's $6.8 billion of first-lien debt by the end of April. The lenders, including J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., have balked, saying the Treasury is seeking excessive concessions. At GM, negotiations are aimed at persuading unsecured bondholders to give up at least two-thirds of their holdings in exchange for stock, newly issued debt and a reduction in principal. Bondholder representatives have complained that the Treasury's auto task force hasn't been open to meeting, even though the government says an agreement is needed by the beginning of June. Treasury officials are planning to meet with the bondholders in the near future, a person familiar with the department's plans said. The two parties met for the first time in early March. One of the GM bondholders' biggest demands -- that the government guarantee GM's newly issued debt with some form of insurance -- has been rejected by the Treasury. It is the latest evidence that the Obama administration is taking a tough stance on GM and Chrysler debt holders. The first part of Ford's cash-and-equity offer, launched last month, received a better reception from creditors than many expected. But the overall buyback plan ultimately came in slightly below the $10.4 billion in debt Ford said it could have retired. The offer was led by Goldman Sachs and the Blackstone Group. The debt deal may have changed the minds of some on Wall Street, who had questioned whether Ford could avoid government loans. J.P. Morgan auto analyst Himanshu Patel wrote in an investor note Monday that the debt restructuring may be a sign that Ford management "believes car sales have bottomed and [has] faith in its own ability to execute" its plan without government aid. Ford shares were up 16% in 4 p.m. New York Stock Exchange composite trading, rising 52 cents to $3.77. Others remained more skeptical about Ford's prospects. "With poor operating results now expected through 2009, Ford's liquidity is becoming strained," Gimme Credit auto analyst Shelly Lombard wrote Monday. On Monday, Standard & Poor's lowered its corporate credit and other ratings on Ford to "selective default" and downgraded certain Ford issue ratings to "D." S&P said it considered the debt-repurchase moves "tantamount to defaults under our criteria." But the ratings firm added it would reassess Ford by mid-April. Ford had $35.8 billion in debt at the end of 2008, including $10.1 billion the company drew down in January through its revolving credit. The auto maker also has payments due to fund a separate trust for its retirees' health care. The health-care liability is $13 billion over 10 years. Half can be paid in company stock under terms of a recent United Auto Workers agreement, reducing the cash obligation to $6.6 billion. Ford said its financing arm, Ford Motor Credit, will use $2.4 billion in cash, combined with stock, to buy back the debt once the offer closes Wednesday. Ford agreed to pay investors about $380 in cash and stock for every $1,000 in bonds, or 38 cents on the dollar, according to company officials. "It reduces our interest expenses between $500 and $600 million a year," Ford treasurer Neil M. Schloss said in an interview Monday. Asked whether he is concerned that Ford's debt-for-equity swap would substantially dilute shareholder value, Mr. Schloss said. "I think that equity holders think we have a long way to go" to improve the Dearborn, Mich., auto makers' operations. The debt buyback is another example of how Ford has capitalized on government requirements imposed on GM and Chrysler to reach deals with stakeholders. In addition to allowing Ford to fund half its retiree health-care plan with stock, the UAW made concessions in wages, benefits and work rules. About $4.3 billion in Ford's 4.25% senior convertible notes due in December 2036 were validly tendered under the debt-for-stock deal, which will result in the issuance of 468 million shares. Separately, under Ford Credit's tender offer, about $3.4 billion of notes were tendered, at a total purchase price of $1.1 billion. —Jeff Bennett contributed to this article. Write to Matthew Dolan at matthew.dolan@wsj.com and John D. Stoll at john.stoll@wsj.com